Regulatory issues associated with the international oils & fats trade

In This Section

January 2011

There are three major areas of regulations concerning the global trading of oils and fats. Firstly, there is the international arena such as that of the International Maritime Organization (IMO). Secondly, there are the standard international contracts for trade such as the FOSFA (Federation of Oils, Seeds and Fats Associations) contracts and NIOP (National Institute of Oilseed Products) trading rules, as well as regional or national legislations such as those of the European Union (EU). Finally, there are some international codes of practice that are becoming increasingly important, for example, the use of the principles of HACCP (Hazard Analysis Critical Control Points) and the Codex Alimentarius Code of Practice for Oils and Fats.

Traders must understand all these laws and rules, and in particular, they should be completely familiar with their contracts. Also, recall that the vast majority of the time, we are dealing with the food industry and that the large amounts of oils and fats produced in the world are for human consumption. Today, food production involves risk management, and this risk must be managed at all stages of the food chain, from farm to fork. One of the most critical areas of risk is the transport of bulk cargoes of oils and fats by sea, from the producing countries to the consuming countries. The main reason the risk is high is that oils in transit are not under the direct control of any of the trading parties. For the duration of the voyage, they are the responsibility of a third party, that is, the shipowner. During this link in the food chain, a vessel carrying edible oil must comply with the legislation developed by the IMO.

IMO and the 2007 Rule Change

IMO is a body of the United Nations and is based in London, UK. Its goals are the development and maintenance of a regulatory framework for shipping, the prevention of accidents, the safety of seafarers, and the protection of the maritime environment. It is also in the process of establishing a compensation scheme such that, in the event of a major shipping accident, funds will be available to pay for the clean-up operation. This is a work in progress, but it will affect the edible oil industry if and when it is adopted. The regulations that govern the prevention of maritime pollution are called the "MARPOL convention." Recent changes to this legislation have had a significant effect on the oils and fats trade.

In 2007, the IMO changed its rules governing the carriage of oils and fats. Before January 1, 2007, their carriage was not regulated. Since then, oils and fats must be carried in ships that are designed and constructed to protect the tanks and limit the amount of oil released into the sea if a collision were to occur. These ships are designated as IMO type 2 vessels. During the development of these rules, it was believed that there would not be enough ship tank space to carry the roughly 50 million metric tons of oil that were being shipped annually at that time. Thus, after widespread country and shipowner representation, IMO issued a derogation, or exception, allowing IMO type 3 ships with certain tank protection characteristics to be used. One aspect of IMO 2 ships is that they are not allowed to load over 3,000 cubic meters of product into any single tank, but IMO 3 ships are allowed to carry much larger volumes. This derogation may come under review in the future, but the rules as they exist currently are acceptable to the international trade.

Another aspect of the MARPOL regulations that has affected the trade is the limit that IMO has placed on the amount of tank residues that can be pumped to sea. Effectively, if the oil is viscous and thick at the time of discharge-meaning that significant quantities will remain in the tank after discharge-then the first tank washings must be pumped to shore and not to sea. This pumping to shore will incur a cost, as these washings must be disposed of in an environmentally acceptable way. Despite this, the overall effect of the change in the IMO rules has been to improve the quality of the shipping fleet that services the oils and fats trade while addressing the protection of the marine environment.

FOSFA Contracts

An estimated 85% of the current world trade in oils and fats uses FOSFA contracts, and it is interesting to consider the reasons for this. The main advantage is that the use of standard form contracts reduces the risk of trading parties misunderstanding the procedures they need to follow to enable the trade to go smoothly. The contracts also reduce the risk in trade as the clauses in the contracts are well known by all parties and reflect long-standing trade practices. This allows the parties to discuss and agree on the important features such as quality, quantity, price, and shipment/delivery dates. Their confirmation letters include these details and usually a statement saying, "All other terms as per FOSFA 80" (for crude palm oil, by way of an example). This means that they do not have to read all the other parties' contracts, which would be necessary if standard contract forms were not available or used. All trading parties would like the contracts to be in their own language and refer to their own national legislation, but this is not practical. Thus, the trade agrees to use one common language and one jurisdiction and, by virtue of history, these happen to be English and the rule of English law, as is common to nearly all internationally traded commodities.

The contracts also reduce risk as they include rules for the hygienic carriage of oils and fats in bulk by sea. These rules are tried and tested and have been developed now over two decades and with much experience. For a FOSFA contract, these rules are contained in the publication generally referred to as "The Carriage of Oils and Fats." Of particular importance in these rules are the two lists of banned previous cargoes and acceptable previous cargoes.

Previous Cargoes

The standard FOSFA trading contracts are based on "banned list terms." The banned list includes the cargoes that led to problems in the 1980s. It was drawn up following work carried out by Unilever when bulk shipping replaced drums, and two-way freight space occupancy became a reality. These materials have persistent properties, are difficult to remove and clean from the tanks, and are generally toxic. The risk of contamination from previous cargoes or from poor cleaning of the tanks is reduced if these substances are not allowed to be carried prior to vegetable oils. So, the basic terms mean that a receiver will accept the parcel of oil if the previous cargo is not on the banned list.

However, some companies wanted to reduce the risk from contamination even further so that their major brands, which have been built up over many years and are very valuable, were not at risk from contamination. The risk to the consumer, and therefore the risk to the manufacturer, can be reduced if the previous cargo is not toxic, is easily cleaned, or is removed by further processing. This desire to reduce the risk led to the development of the lists of acceptable immediate previous cargoes. FOSFA developed its acceptable list in the early 1990s. This led to the writing of an optional clause, which could be added to the standard contract, thus converting it into an "acceptable list terms" contract. In other words, the receiver will accept the cargo only if the previous cargo is on the acceptable list. This requirement for a lower risk and the use of this type of contract are entirely the choice of the purchaser or receiving company, except when national regulations apply. It is also evident that Acceptable List trade is increasing and going well beyond European shorelines, where it had its dominance in the 1990s and influenced EU regulation development at that time.

Certain regions such as the EU and the United States (via NIOP acting as the US trade body) have already made this choice for the trader by virtue of their wish to protect the health of the consumer. EU legislation requires that all food products be carried in dedicated transport. However, FOSFA approached the European Commission (EC) on behalf of its members and persuaded the EU that dedicated shipping, initiated in 1995, was not in the interests of any country. The distances are large and the freight is expensive, so ships returning with empty tanks are not economic. More recently, this has been supported by the need to minimize the carbon footprint of the whole transport chain. Thus, the EU adopted a similar list to the FOSFA list of acceptable previous cargoes, but the European Food Safety Authority (EFSA) did not agree with the inclusion of a few of the products on the list. They felt that data were insufficient to make a judgment and changed the FOSFA list slightly. But most of these cargoes are not carried in great volumes, and they could be removed from the FOSFA and NIOP Acceptable Lists without reducing the available ship space or the flexibility that charterers and owners seek. The recent decision by the EC to re-evaluate their acceptable list has meant that the decision to amend these trade lists has been postponed.

International Codes of Practice

The final area concerning the legislation for oils and fats is the issues related to international codes of practice. One code that has been adopted by several countries is the use of HACCP. This control scheme for safe food manufacture has been included in the legislation of many countries, including those of the EU and United States. The HACCP scheme and its seven principles can readily be applied to the transport of oils and fats by sea.

The international body that is concerned with worldwide food safety and fair world trade is the Codex Alimentarius Commission. This international body was convened under the auspices of the Food and Agriculture Organization and the United Nations in 1963. It develops food standards, guidelines, and related texts such as codes of practice, and has over 175 member countries and 15 committees. In the past decade, the food safety aspect of its work has dominated the committee proceedings, while the "trade forum" component has been left to other bodies such as the World Trade Organization.

The Committee of most interest to our trade is the Codex Committee on Fats and Oils (CCFO); the Secretariat for this committee is now held by Malaysia. This Committee has had a code of practice since 1987: Recommended International Code of Hygienic Practice for the Storage and Transport of Edible Oils and Fats in Bulk. This code currently does not have much impact on the world trade as very little volume is traded on the basis of Codex standards and codes. It is used or referred to occasionally for intergovernmental dealings, usually for food relief purposes. However, this situation could change, and it may become an opportunity to generate an international harmonized banned list and an acceptable list for the purposes of trade in oils and fats. Codex already has an agreed banned list, which includes most of the products on the FOSFA banned list. It is noteworthy that FOSFA has recently added crude petroleum and some petroleum oil products to its banned list as a result of the introduction of the new IMO Marpol regulations. Since these came into force, some ships that once traded only within the petroleum industry have moved into the vegetable oil industry. This has meant that FOFSA has had to include substances that were never considered at the time of the original list.

The CCFO is in the rather lengthy process of developing its acceptable list. It currently has a draft list at Step 7 and a smaller proposed draft list at Step 3. These steps relate to the progress of the standards as they move toward general acceptance, from Step 1 to Step 8. Thus, the major part of the acceptable list is in an agreed draft form. There have been no health issues with any of the substances in the draft list at Step 7, which is effectively equivalent to the FOSFA list as it was in 1996 when it was adopted by the EU. However, the proposed draft list at Step 3 is more contentious. CCFO has developed a set of draft criteria that it feels could be used to assess the suitability of a substance being regarded as an acceptable previous cargo.

Briefly, these criteria state that an oil is to be carried in appropriate systems with cleaning, inspection, and recording systems. The previous cargo must have a minimum Acceptable Daily Intake (ADI) of 0.1 mg/kg of body weight/day, it must not contain a known food allergen that is not removed by further processing, and any known reaction products with oils must also comply with these criteria. However, these criteria are deemed very cautious. As representing the industry, FOSFA generally supports these criteria but feels that the further processing of the oils at their destination should be taken into account, thus allowing a lower ADI to be allowed in this case. There is also the problem of assessing materials that do not have an ADI value. Nevertheless, we believe that overall, the criteria have a 10× safety margin built into them, but they are the only set of criteria that have a defined level of toxicity for previous cargoes.

The criteria have been discussed by the EFSA, which concluded that they do not contradict the criteria used by the EU to consider previous cargoes. Thus, the hope is that these amended criteria will be agreed at the next meeting of the CCFO in February 2011 and allow the acceptable list to be adopted. There will be opposition to this adoption from the US delegation as they are against Codex having any lists, believing that the trade lists are adequate. However, this would leave the industry with at least three major lists of acceptable previous cargoes, namely, FOSFA, EU, and NIOP. Harmonization of the lists is a praiseworthy goal as this would prevent any potential of costly errors being made in the allocation of tank space. But, this should not be pursued if it were to reduce the ship tank space available to the trade.

Further Considerations

Assuming that the lists are agreed within the Codex Code of Practice, there are still some anomalies as the Code does not reflect the current practice of world trade. Firstly, there needs to be a timely procedure for maintaining the lists with the removal and addition of materials. More than one or two proposed changes each year are unlikely, and as long as the proposing organization provides all the necessary data for making a full hazard profile, then this job should not be too arduous for a body such as the Joint Expert Committee on Food Additives (JECFA) to evaluate their status between the Codex meetings.

Secondly, the use of banned list terms and acceptable list terms must be included in the Code. Currently it does not say that tanks that have carried banned list cargoes as the immediate previous cargo cannot be used to carry edible oils. It also states, "Previous cargoes not on the current Codex Lists are only to be used if agreed upon by competent authorities of the importing countries." This is not a practical suggestion, as few countries would put in the required effort. On top of this, looking at the multitude of cargoes that are not on either list is unnecessary when the concepts of banned list terms and acceptable list terms are fully understood.

Making these few changes to the Codex Code of Practice would support the world trade and go a long way to providing a useful code of hygienic practice. The code would not replace the use of trade contracts since these include all the necessary commercial aspects of selling and buying oils and fats, but it could provide a universally acceptable scheme for protecting the health of the consumer during the most hazardous part of the food chain for oils and fats.

John Hancock is the technical manager of FOSFA International, based in London. He has represented and promoted the interests of the oils and fats trade in many national, regional, and international technical arenas. This article is based on his presentation to the Oils & Fats International Congress held in Kuala Lumpur, Malaysia, in October 2010. Contact him at John.Hancock@fosfa.org.